Chemicals

The global chemicals industry remains mired in a downturn driven by weak demand and chronic oversupply. Since 2022, sluggish consumption in construction and automotive—its two largest downstream markets—has collided with aggressive capacity expansions, particularly in China. Falling energy prices have enabled US and Middle Eastern producers to boost output, reinforcing global imbalances and squeezing margins.

Petrochemical oversupply remains the defining challenge: China continues to invest in new plants despite poor margins, though authorities are considering anti-involution measures, including retrofitting older facilities to improve yields and move up the value chain. Meanwhile, US and Gulf producers leverage cheap ethane and subdued energy costs to maintain a structural cost advantage, aggressively exporting basic petrochemical building blocks (olefins, aromatics, and other derivatives).

Europe continues to face the harshest pressures. High energy and carbon costs erode competitiveness as imports of low-cost polymers from the US and Middle East surge, alongside Chinese exports of downstream products. Margins are collapsing, output is falling, and plant closures are accelerating. Calls for government intervention via anti-dumping duties, energy subsidies and carbon levy relief have so far yielded only announcements, but limited action.

Asia outside China is also struggling. India’s specialty chemicals sector is growing on pharma and agrochemical demand but faces US tariff shocks, while South Korea is experiencing a decline in exports and consolidation. Oleochemicals in Malaysia and Indonesia benefit from bio-based trends but remain exposed to the global overcapacity. Above and beyond bankruptcies, the responses of industry survivors include closing plants for modernisation, consolidation and diversification toward specialty chemicals and high-performance polymers. Gulf producers are pursuing crude-to-chemicals technology, and major firms are reshaping their portfolios through divestments and acquisitions (e.g., ADNOC’s EUR 11.7?billion purchase of Covestro).

Fertiliser markets have stabilised but remain exposed to energy volatility and geopolitical risks. Nitrogen prices have rebounded to USD 700–USD 800 per tonne despite lower gas costs, while phosphate and potash markets show relative stability amid tight supply and tariff adjustments.

The global chemicals sector remains in a downturn

The global chemicals industry remains mired in a prolonged downturn, with capacity utilisation falling below 75% among major producers. Weak demand combined with persistent oversupply is driving this trend, hitting basic chemicals hardest. Since 2022, sluggish consumption in construction and automotive has collided with aggressive capacity expansions, particularly from China, whose share of global production capacity in key basic chemicals (e.g., acrylic acid, benzene, propylene, ethylene oxide, soda ash, styrene) is approaching 50%. This surge has depressed utilisation rates globally and is squeezing margins and weighing on prices. Meanwhile, falling energy costs have enabled producers in the US and Middle East to ramp up output, deepening the imbalance and redirecting trade flows toward low-cost regions.

Demand for chemicals remains soft across most segments, reflecting broader economic headwinds. Construction and automotive, the two biggest downstream markets, continue to drag on volumes. Improvement is, however, expected in some geographies for both sectors in 2026. In addition, consumer-driven categories such as beauty and fragrances are normalising after years of record growth. This is forcing suppliers of aroma compounds, solvents, and packaging polymers to recalibrate capacity and pricing strategies.

Petrochemical oversupply remains the defining feature of today’s markets. China illustrates the challenge: despite weak margins and chronic overcapacity, investment in new plants is continuing. Chinese polyethylene capacity is even expected to expand by another 16% in 2026 (source: JLC). Authorities are, however, discussing anti-involution measures to curb redundant expansion. This includes plans to temporarily shut down older petrochemical facilities (~40% of national capacity) for retrofitting aimed at improving yields and potentially moving production further up the value chain. If implemented, the move could offer significant relief to the sector in the medium term. In addition to the high capacity in China, the US and Middle Eastern producers continue to enjoy a structural cost advantage over naphtha-based rivals (e.g., Europe) thanks to cheap ethane and subdued energy prices. This enables highly competitive ethylene output and aggressive exports of derivatives such as polyethylene.

Europe weighed down by cost pressures and import flood

Given favourable supply conditions and persistently weak demand fundamentals, global prices and margins remain under pressure, with Europe bearing the brunt. US and Middle Eastern producers are exerting pressure on the European market by supplying low-cost polymers, while China is ramping up its export footprint of cheaper downstream products such as PVC and PET. European firms, hampered by high energy and carbon costs, continue to lose competitiveness, resulting in squeezed margins, falling output, and accelerating plant closures.

Recent indicators point toward a prolonged downturn. In EU27, overall activity is still declining on a YoY basis, with production sitting at 20% below 2019 levels. Germany, Europe’s largest chemical producer, remains its main laggard. Business surveys also point towards a prolonged downturn: new orders are still weakening across the continent, with companies citing the weak demand as the principal factor limiting their production. The overall capacity utilisation rate also remains below 75% but seems to be stabilising thanks to recent plant closures.

European chemical producers are intensifying calls for government intervention as cost pressures escalate. Their demands include anti-dumping duties, energy subsidies and the removal of carbon levies. Policy response has been sluggish and the effects are yet to be felt. For example, the EU recently unveiled the Chemical Industry Action Plan to address these competitive constraints. Germany has also proposed a relief package (pending implementation) for energy-intensive industries by setting an industrial electricity price of EUR 0.05/kWh from 2026, alongside lower electricity taxes and fees. However, none of these measures has yet to materialise.

Asia, outside China, also remains under pressure. India’s specialty chemicals sector is expanding on pharma and agrochemical demand, but the 50% US tariff shock will force rerouting and erode competitiveness. In response, they have eased import curbs on basic chemicals like PVC and PE from China. South Korea faces declining exports and eroding competitiveness amid weak Chinese demand, which is driving consolidation (e.g., Lotte-Hyundai). Meanwhile, Malaysia and Indonesia’s oleochemicals gain from the global pivot to bio-based inputs, despite overcapacity and broader market weakness.

Opportunities amid the downturn

The chemical sector is navigating a cyclical slowdown, yet pockets of resilience remain. Commodity chemicals, produced at scale and sold on thin margins, are bearing the brunt. Falling prices are squeezing non-competitive producers out of the market, reshaping trade flows and concentrating market share in countries with structural cost advantages, notably the Middle East, the US and China. These players, even under pressure, are better positioned to weather the storm.

Specialty chemicals tell a different story. Produced in smaller volumes for niche applications and commanding higher margins, they offer pricing power and limited substitution. With cheaper feedstocks available, specialty producers often outperform during downturns.

This divergence is prompting strategic shifts. Large commodity players are using the downturn to upgrade infrastructure and climb the value chain. In China, policy-driven “involution” is accelerating the renovation of aging facilities and pivoting toward specialties. Gulf producers are exploiting cost advantages and pursuing acquisitions to expand downstream, while investing in crude-to-chemicals technology—boosting petrochemical yields to 70–80 percent versus 10–20 percent in conventional refining. In addition, temporary plant closures for upgrades are becoming more common as companies seek to position themselves for higher-value production once demand recovers.

Consolidation is gathering pace as firms seek scale and innovation. ADNOC’s EUR 11.7?billion purchase of Covestro underscores the push toward high-performance polymers and integrated platforms. US companies are also reshaping portfolios: Occidental is divesting OxyChem and DuPont is exiting aramids to sharpen its focus on specialties.

Fertiliser markets stabilise but risks persist

Fertiliser prices have moderated from the 2022 peak but remain above pre-crisis averages. The recent decline in natural gas prices has eased production costs for nitrogen-based fertilisers, while US tariff exemptions on nitrogen and phosphate products are improving trade flows and reducing domestic price pressures. Demand remains firm, supported by crop prices and seasonal planting, but supply growth is limited and further restricted by China’s tighter export controls on phosphate fertilisers, thus leaving markets exposed to energy volatility and geopolitical risks.

Nitrogen prices have rebounded to USD 700– USD 800 per tonne despite lower gas costs, reflecting tight supply and strong seasonal demand. US tariff exemptions may create short-term oversupply and intensify competition among exporters. Phosphate prices have stabilised, but exemptions are expected to narrow US-global price gaps and boost imports from Morocco and Saudi Arabia, while China’s export restrictions continue to limit global availability. Potash markets are comparatively stable at USD 300– USD 350 per tonne, underpinned by resilient supply from Canada and Belarus and low volatility relative to other segments. Despite geopolitical risks, Russian shipments have continued largely uninterrupted, thereby reinforcing market stability.

Chart 2 EN (insert title below)

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Graphe 1 : Taux d’utilisation de la capacité

Source: FED, DG ECFIN, NBS, Macrobond, Coface